April 15, 2011

Real Estate 3.0

Lured by the promise of free land, many people of European descent emigrated to the United States and Canada to settle and elevate their standing in a new world. Post WW II, home ownership would become synonymous with the American Dream. But as home ownership became virtually ubiquitous towards the end of the 20th century, the affluent, of which there was a rapidly growing number, sought to separate themselves through ever larger homes, higher-quality finishings and ownership of multiple properties. And the middle class tried to keep up with them. We were collectively obsessed about closing the gap between us and them, and we sought visible, conspicuous means to do it. A long-run bull market fueled the expansion of the affluent class, which in turn sparked rapid growth in the construction of private golf communities, suburban McMansions, mountain resort villages and condominium towers in sunny locales – all finished with granite countertops, marble floors and “professional” kitchen appliances. 

Of course we all know how the story ended in 2008, and it’s left us wondering about the meaning of a home today and how we should market real estate moving forward. Has our love affair with real estate come to an end?

A survey conducted periodically since 1970 by GfK Custom Research has monitored what we consider to be part of “the good life.” As you can see on the chart below, the desirability of home ownership for the average American rose steadily, but then fell dramatically.

Given this context, as real estate crawled from the ooze of the recession in 2010, we had this idea that its marketing had to take a new direction. Hadn’t Richard Florida just written an article in The Atlantic , in which he predicted “New patterns of consumption, and new attitudes toward ownership that are less centered on houses and cars?” And didn’t Spend Shift, a Wall Street Journal bestseller, say that “Old status symbols no longer appeal, as purpose, character, authenticity, and creativity become pathways to the new good life”?

The world had changed (we hoped), and marketing had to change with it. Instead of telling stories about places we aspire to, places that are a reward for success, and places we deserve because we’re big shots, marketers would tell ‘bigger’ stories – stories about communities and how a project and a buyer belonged to it. In this kinder, gentler real estate marketing, things would be about more than just ‘me’, the singular consumer. It would be about ‘we’. All of us would be contributing to something larger than ourselves. It would be redemption. 

We had, we thought, proof of this: three projects we’d worked on for Chard Development in Victoria, BC, had presented condominiums as a part of downtown, as catalysts for growth, density and community in the core of BC’s capital city. Local merchants  were photographed, a small magazine that brought the streets to life for prospects was produced. The Downtown Business Development Association was enthusiastic, and the collateral pieces made their way into stores. People talked. Everyone felt warm and fuzzy. Chard’s projects have sold out or are selling well – better than most in Victoria. 

Working with the Calgary Municipal Land Corporation over the past three years to rebrand and revitalize the city’s forlorn East Village, we presented the project to politicians, developers and the public not as an isolated urban renewal initiative but as a redefinition of the city’s downtown that will benefit the city at large and attract not only visitors, but capital from abroad. And we succeeded. Public support for the project is strong, newly elected Mayor Nenshi touts East Village far and wide as the “jewel” of the city, and the second $300 million mixed-use development deal has just been announced. 

Then a project in Vancouver seemed to validate the success of the ‘me-to-we’ positioning: 60 West Cordova in Gastown, which described itself in an artfully bare-bones website as “based on principles of inclusivity and doing more with less” and “looking for residents who want to be part of something meaningful – owner occupiers, good neighbors interested in contributing to the fabric of the neighbourhood.” All for the unprecedented low price, for downtown Vancouver, of somewhere between $259K and $306K. The project sold out to stunned neighbors who never thought they’d own, and on the For Sale sign on the property, which is located beside the Army and Navy store, were emblazoned the words, “Fully subscribed by the neighbourhood.” 

As if that weren’t enough, it even seemed that the ‘bigger,’ we-not-me story was even getting traction in the notoriously egocentric high-end resort niche. A new luxury community called Kukui‘ula in Kaua‘i that we visited recently has a private golf course, all right. But fostering family experiences, not improving golf scores, was the guiding principal from the get-go for developer DMB. There’s an entire room in the clubhouse dedicated to kids activities, a games room, a sprawling complex of pools and waterfalls born out of a child’s imagination, a down-to-earth community farm, and an “island pursuits” team to organize family activities and adventures. It seemed a dramatic shift from the Desert Mountain days in the 1990s, where children were merely tolerated, to the creation of a place in which they are celebrated.

We went so far as to hypothesize that perhaps we are all realizing that it is not the stuff we accumulate that matters, but the stories we share with those we hold dear. What if the stories and moments facilitated and celebrated at Kukui‘ula – and, in an urban setting, the comfort of caring neighbors and a stimulating ‘hood – were becoming our most desired lifestyles and luxuries instead of the quality of our countertops and kitchen cabinets?

But when we went to talk to the developers of the 834 in Victoria, 66 West Cordova, Calgary’s East Village and Kukui‘ula, we learned that we were both right and wrong. Things have changed, but not exactly in the way we thought. 

Dave Chard, the developer of Corazon, Juliet, The 834 and The Sovereign in Victoria, is a man of charming earnestness, a guy who has brought more than a thousand much-needed residents to downtown Victoria and a developer with a clearer vision of the future of the city than any dozen city councillors of the past decade. For him, the ‘bigger’ downtown community story was useful and timely and appropriate, but his success wasn’t just about that. It was, he said, “about delivering what we said we would deliver” – new condos of dependable quality at a reasonable price in a neighborhood of some appeal. That’s why he was still in business in Victoria. 

OK, so maybe marketing can’t save the world. But maybe, combined with an honest developer, it can help grow a downtown. 

Ian Gillespie of Westbank, the developers of 60 W. Cordova, along with the much-discussed Woodwards Building nearby and also the Shangri-La, Vancouver’s tallest building, acknowledged that yes, people want to make a difference and contribute, and he hopes to one day have 10 buildings in Gastown, and he’s more than happy to “add 150 people to the neighbourhood who give a shit about the neighbourhood.” But 66 W. Cordova was also a lot about...Ian Gillespie. “I was getting bored. I wasn’t growing,” he says. “In our team, we see ourselves as artists, and it’s about creating a body of work. Cordova is just one aspect of that.” 

OK, so developers still have egos, even in our embattled times. And granted, Westbank’s body of work started with shopping centers, so as artists, they’ve come a long way. Also, technically speaking, Gillespie is one of the most successful developers in Canada, and has the luxury of picking and choosing projects. But 66 W. Cordova wasn’t redemption for him. It was experimentation.   

Batting 0 for 2, we began to reconsider.

With an office here on the West Coast, we’ve had front row seats to watch the development of two of the “greenest” mixed-use community projects in North America – Dockside Green in Victoria, B.C. and the Olympic Village here in Vancouver, projects that achieved LEEDS Platinum and Gold ratings respectively, and both of which have been spectacular failures from a financial point of view. In fact, they are excellent projects that were missing just one key ingredient – a market. 

While their failure highlights the obvious –  that buyers are not willing to pay a large premium for green construction – there is another lesson to be learned that we believe will shape the development of real estate throughout North America in the decade to come: after 20 years of marketing all kinds of real estate, from oceanfront condominiums to golf communities to urban lofts as “luxury” products, that one-size fits all positioning no longer works. Real middle class buyers today are looking for good old-fashioned value from a developer that keeps his promises – the kind Chard delivers – and they are more interested in the greater community that their purchase will connect them to. 

For these households, we now believe that it isn’t so much an enormous, society-wide values and paradigm shift, the way authors like Florida and others maintain.  What it’s reallyabout is the fact that the (North) American Dream and the middle-class’ recent love affair with luxury has been confronted with a new American Reality. As New York Times Magazine columnist and author Rob Walker told us, “Someone who is cutting back because they got fired yesterday is not really reflective of a change in values – that’s reflective of a change in income,” he says. “We can’t really know if there has been a permanent change in American values vis-à-vis how people spend their money until there is more money around to spend.”

THE AFFLUENT SELL

For the affluent market, there’s even less evidence for a paradigm shift in values and priorities – in fact, it’s essentially business as usual. They are not particularly interested in community and the ‘we not me’ story we were hoping to tell. Nor are they interested in “luxury” in the way we’ve become accustomed to defining it via features, finishes and amenities. True luxury, the kind that affluent buyers are looking for today, is about exclusivity and the relative rarity of the experiences and stories their purchase will allow them to tell. And for all the talk about paradigm shifts at last fall’s ULI conference in Washington DC, the reality is that the attitudes and aspirations of this group have not changed much at all.

Research that Resonance conducted with the Luxury Institute of America’s wealthiest households in 2008 and 2010 bears this out: while the rest of us were reeling, the very rich were not feeling the pinch enough to fundamentally change their values and aspirations, even if they backed away from bling, as was widely reported. In fact, the number of individuals with incomes of $150,000+ in the U.S. (approximately 8% of the working population) is almost the same now as it was before the recession.The fact of the matter is that second homes were as desirable at the beginning of the crisis as they were at the end for this group. The paradigm shift isn’t in the values of the affluent but in the size of the market that can actually still afford the trappings of wealth – now that the upper middle class has been taken out of the game. The truly wealthy might have been momentarily abashed, cash-flow wise, in the recession. But the much larger market of people who wanted to imitate the lifestyles of the very wealthy has absolutely gone away. And that is a key distinction to understand in Real Estate 3.0 and why a project like Millennium Water failed. Priced 30% higher than comparable non-LEEDs product, the village didn’t provide real value for real buyers and its location and ‘we over me’ community story did not curry favor with the affluent buyers who could actually afford it. It was only when the price came down to earth that Millennium Water, re-baptized The Village on False Creek, started to move again. 

The real estate market is now bifurcated between those seeking value and community and those seeking exclusivity and scarcity of experience that a place can offer. In many ways we’ve come full circle. At the end of the (new) day, it’s a much bigger real estate marketing world now than it was just five years ago, and one single narrative isn’t going to sell a place out – neither “location, location, location” or “privacy, privilege, prestige” alone. The approach we take to selling new condos in a revitalized urban village will be quite different from that for ocean view homes in Kaua`i – and in markets like Vancouver, where there is a mix of both foreign and domestic buyers, it may be a mix of both. Certainly, there’s room for the ‘we’ story, one that’s a bigger story than one building, one developer, or one buyers’ lifestyle and aspirations. But we’re quite convinced that the ‘me’ story, in some form, will never entirely go away.